Benchmark 10-year yields dropped to a new seven-year low
after Bank of Japan Governor Masaaki Shirakawa said the central
bank may increase the size of a fund it’s setting up to buy
government debt and other assets. The yen appreciated to near a
15-year high, even after the BOJ introduced what it called
“comprehensive” easing measures.

“The yen is prone to appreciate with central banks
globally inclined to monetary easing,” said Keiko Onogi, a
fixed-income strategist in Tokyo at Daiwa Securities Capital
Markets Co. “Given that, Japan has no choice but to steer
toward easing. Ten-year yields still have room to fall and may
sink below 0.8 percent by the year-end.”

The yield on the benchmark 10-year bond fell six basis
points to 0.835 percent as of 3:10 p.m. in Tokyo at Japan Bond
Trading Co., the nation’s largest interdealer debt broker. The 1
percent security due September 2020 rose 0.555 yen to 101.514
yen. Yields dropped to as low as 0.82 percent, the least for a
benchmark 10-year bond since July 1, 2003. Today’s decline in
yield was the steepest since Nov. 12.

Ten-year bond futures for December delivery gained 0.48 to
144.15 in Tokyo, the highest close since June 2003.

Benchmark yields reached a record low of 0.43 percent on
June 11, 2003, after the BOJ said it would buy corporate debt.
The yield climbed to 1.94 percent in 2004.

Longer Duration

The Bank of Japan yesterday cut its benchmark interest rate
to a range of zero to 0.1 percent, from a level of 0.1 percent
previously. The BOJ will set up a 5 trillion yen ($60 billion)
fund to buy government debt, exchange-traded funds and real-estate investment trusts, it said in a statement.

The central bank said it will keep the “virtually zero
interest rate policy” until it decides that “price stability
is in sight.” The BOJ board considers prices stable when they
are in a positive range of up to 2 percent, with a median of 1
percent, the statement said.

“The risk of rising interest rates won’t be in sight for
quite some time,” said Susumu Kato, chief economist in Tokyo
for Japan at Credit Agricole CIB and CLSA. “That’s leading
investors to extend the duration of their portfolios.”

Duration is a measure of the sensitivity of a bond’s price
to changes in interest rates. Bonds with longer durations have
greater price decreases for each incremental rise in yield than
bonds with shorter durations.

Auction Tomorrow

The yen touched 82.96 yesterday, the strongest since Sept.
15. Japan intervened to weaken its currency that day for the
first time since 2004 after the yen reached 82.88, the highest
level since May 1995. A stronger yen reduces the value of
overseas sales at Japanese companies when repatriated.

“As measures against the yen’s strength aren’t taking
effect, speculation persists that the Bank of Japan will expand
the scale of asset purchases,” said Takehito Yoshino, chief
fund manager at Mizuho Trust & Banking Co. in Tokyo. “Catalysts
for the bond market have yet to run out.”

The Federal Reserve, which will meet next month, said in a
policy statement on Sept. 21 that it’s prepared “to provide
additional accommodation if needed to support economic
recovery.” The U.S. central bank snapped up $300 billion of
Treasuries last year, and said in August it would reinvest
proceeds from maturing mortgage holdings into government debt.

“The Fed is likely to introduce more easing measures in
November or December,” said Eiji Dohke, Tokyo-based chief
strategist for Japanese government bonds at Citigroup Inc.
“There is no end in sight to the easing competition.”